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Why Good Brands Fail Due Diligence: The 9 Data Room Problems Investors Find in Week Two, and the Real 6 to 10 Week Closing Timeline
Term sheets rarely die because the brand is bad. They die because diligence finds something the founders did not know or did not say. The nine problems we see most, a data room checklist, and a realistic closing timeline.
Published 27 September 20269 min read
The short answer
Most Indian startup rounds take 6 to 10 weeks from signed term sheet to money in the bank: 3 to 5 weeks of financial, legal and tax diligence, then 3 to 5 weeks of documents, approvals and filings. Deals slow down or fall apart when revenue in the deck does not match GST returns and books, the cap table has undocumented promises, intellectual property sits with founders, regulatory licences do not match the business, or cohort numbers cannot be reproduced from raw data. All nine common problems are fixable if found before an investor finds them.
Who this is for: Founders who have a term sheet, or expect one within 60 days, for a seed, pre-Series A or Series A round in India.
Summary: what most founders miss
- Diligence is less about finding fraud and more about testing whether the founders know their own business. Every unexplained gap costs trust.
- The single most common finding in consumer brands is a mismatch between deck revenue, books, GST returns and marketplace settlements.
- Trademarks, domains and formulations owned by a founder personally, or by a contract manufacturer, are a closing condition, not a footnote.
- A clean, indexed data room shared within 48 hours of the term sheet shortens closing by weeks.
- Run your own pre-diligence three months before you raise. It is the cheapest insurance in fundraising.
A signed term sheet feels like the finish line. It is closer to the halfway mark. Between the term sheet and the money sit several weeks of the investor's team, and usually external accountants and lawyers, going through your business line by line. Most founders underestimate how long it takes and how much it can change.
The good news: the problems diligence finds are predictable. We see the same nine again and again.
What does due diligence cover at seed and pre-Series A?
| Workstream | Who does it | What they test | Typical duration |
|---|---|---|---|
| Financial | Investor's team, often an external accounting firm for ₹5 Cr+ rounds | Revenue quality, margins, cash, working capital, MIS vs books | 2 to 4 weeks |
| Legal | Investor's law firm | Incorporation, cap table history, contracts, IP, licences, employment, litigation | 2 to 4 weeks |
| Tax | Accountants, sometimes within the financial workstream | Direct tax, GST, TDS, transfer pricing if relevant, past allotments | 1 to 3 weeks |
| Commercial | Investor's team | Customer calls, channel partner calls, cohort rebuild, competitive position | 1 to 3 weeks, often before the term sheet |
Swipe the table sideways to see all columns.
The 9 problems investors find in week two
| # | Problem | How investors find it | What it signals | Time to fix |
|---|---|---|---|---|
| 1 | Deck revenue ≠ books ≠ GST returns ≠ marketplace settlements | Three-way reconciliation | Founders do not know their real revenue | 1 to 4 weeks |
| 2 | Contribution margin cannot be rebuilt from raw data | Order-level export and settlement reports | Unit economics overstated | 2 to 6 weeks |
| 3 | Cohorts cannot be reproduced | Shopify or app exports rebuilt by analyst | Retention story may be selective | 1 to 3 weeks |
| 4 | Cap table promises not documented | Founder interviews, employment letters, emails | Hidden dilution, future disputes | 2 to 8 weeks |
| 5 | Past allotments not compliant | Registrar filings, board minutes | Company law and FEMA exposure | 3 to 10 weeks |
| 6 | IP not owned by the company | Trademark registry, domain WHOIS, manufacturer contracts | The brand itself may not belong to the company | 2 to 12 weeks |
| 7 | Licences do not match the business | FSSAI, cosmetics, Legal Metrology, BIS checks | Regulatory risk to sales | 2 to 12 weeks |
| 8 | Inventory in books does not match the warehouse | Stock count, ageing report | Hidden write-offs, weak controls | 1 to 3 weeks |
| 9 | Related-party dealings not disclosed | Vendor list, bank statements, director interests | Governance risk | 1 to 4 weeks |
Swipe the table sideways to see all columns.
1. Four different revenue numbers
The deck says ₹24 Cr. The books say ₹19.6 Cr. GST returns show ₹21.1 Cr of taxable value. Marketplace settlements add up to something else again. Each difference has an explanation (GMV vs net, GST inclusion, returns, timing, credit notes), but if the founders cannot produce the bridge in a day, investors assume the worst. Build the reconciliation before you go out.
2 and 3. Unit economics and cohorts that do not rebuild
Analysts will ask for raw order-level data and build their own CM2 and cohort tables. If their numbers differ from your deck by more than a few points, the conversation shifts from your growth to your credibility. See CM1, CM2, CM3 for the definitions investors use.
4. Handshake equity
"We promised our first marketing hire 1%." "The advisor gets 0.5% when we raise." "My co-founder's cousin put in ₹10 lakh in 2022 and we will give him shares later." Every unwritten promise is either future dilution or a future dispute. Investors will ask founders directly, and they will ask employees on reference calls. Write everything down, decide what is real, and document it through ESOP grants or allotments before diligence.
5. Past allotments done informally
Every past round is re-examined: resolutions, private placement offer letters, separate bank accounts, allotment timing, filings and, for foreign money, FEMA reporting. Defaults can usually be compounded, but compounding takes weeks. The full list is in Angel Tax Is Gone: The Tax and Compliance Traps.
6. The brand belongs to someone else
In consumer brands, this is the most dangerous finding and one of the most common. The trademark was filed by the founder in their own name before the company existed. The domain and social handles are on a founder's personal account. The formulation belongs to the contract manufacturer, who could sell it to anyone. The packaging design was made by a freelancer with no assignment of copyright.
7. Licences that do not match the business
Food brands need the right FSSAI licence category for their turnover and operating model, covering every location and the contract manufacturer. Cosmetics brands depend on the manufacturer's licence under the Cosmetics Rules, 2020, and imports need registration. Every packaged product must meet Legal Metrology labelling rules: MRP, net quantity, manufacturer or marketer details, date and consumer care information. Some categories need BIS certification. If your brand collects customer data, the Digital Personal Data Protection Act and its rules, notified in November 2025 with obligations phasing in, will increasingly show up in diligence questions. A licence gap can stop sales on marketplaces and in modern trade overnight, which is why investors take it seriously.
8. Inventory that is not there
Books show ₹2.4 Cr of inventory; the warehouse count and ageing report show ₹1.9 Cr of saleable stock and ₹35 lakh that is expired or near expiry. Investors will adjust the balance sheet and ask what else is not written off. Count before they do. More in The Working Capital Trap.
9. Related parties
A distributor owned by a founder's relative, a warehouse rented from a director, a contract manufacturer where a founder is a partner. None of these are wrong in themselves. Undisclosed, they look like value leaking out of the company. Disclose them in the first week, with the terms and the board approvals.
A public example of what is at stake
In January 2023, the founders of GoMechanic, a car servicing startup, publicly admitted to errors in financial reporting after problems surfaced around a planned funding round. Investors ordered a forensic audit, the company let go of about 70% of its workforce, and about two months later it was sold in a distressed deal to a consortium led by Lifelong Group. Most diligence findings are nothing like this. But this is why investors reconcile everything, even for honest founders: they cannot tell the difference until they check.
The data room investors want
| Folder | Contents |
|---|---|
| 1. Corporate | Incorporation documents, current articles, register of members, all board and shareholder resolutions, Registrar filings, cap table (fully diluted, with history) |
| 2. Past rounds | Every SSA, SHA, PAS-4, PAS-3, valuation report, FC-GPR and FEMA filing, convertible instrument terms |
| 3. Financials | Audited accounts (last 2 to 3 years), monthly MIS (18 to 24 months), revenue bridge, bank statements, debt schedule |
| 4. Unit economics | Order-level exports, channel P&L to CM3, cohort tables, marketing spend and ROAS by channel, marketplace settlement and ad reports |
| 5. Tax | Income tax returns, GST returns with reconciliation, TDS returns, notices and replies |
| 6. Commercial | Top 10 customer or channel partner contracts, quick commerce and modern trade agreements, debit note register |
| 7. Operations | Contract manufacturer agreements, inventory ageing, stock count, supplier list, related-party list |
| 8. IP and regulatory | Trademark certificates and applications, assignments, domain ownership, FSSAI or other licences, labelling compliance |
| 9. People | Organisation chart, employment contracts for key staff, ESOP scheme and grant register, PF and ESI compliance |
| 10. Legal | Litigation, legal notices, consumer complaints summary, data protection policies |
From term sheet to money in the bank: the real timeline
| Week | What happens | What founders should be doing |
|---|---|---|
| 0 | Term sheet signed, exclusivity starts | Share data room; appoint your lawyer; commission valuation report |
| 1 to 3 | Financial, legal and tax diligence; questions and calls | Answer question lists within 48 hours; start fixing findings immediately |
| 3 to 5 | Diligence report; SSA and SHA drafting and negotiation | Negotiate documents; line up board and shareholder approvals; check authorised capital and demat status |
| 5 to 7 | Conditions precedent: fixes, approvals, special resolutions, PAS-4 issued, separate bank account opened | Complete every condition on the list; get waivers and consents from existing investors |
| 6 to 8 | Funds received; allotment by board | Allot within 60 days of receipt |
| Within 15 days of allotment | Return of allotment (PAS-3) filed | Funds can be used only after this filing |
| Within 30 days of allotment | FC-GPR filed for foreign investors | Share certificates or demat credit to investors |
| After closing | Conditions subsequent: governance changes, policies, pending registrations | Deliver on time; it is your first test with the new board |
Where it slips: existing investors slow to sign waivers, authorised capital needing an increase, valuation report delayed, a trademark assignment still pending, a foreign investor's bank taking a week to process KYC, or a finding that needs compounding.
Case study
The round that closed in five weeks
Beauty brand, ₹2.1 Cr monthly revenue, raising ₹12 Cr pre-Series A
Situation
The founders had run their own pre-diligence three months earlier, with an external accountant and a startup lawyer.
What was missed
The pre-diligence found a trademark in the founder's name, one past angel allotment with PAS-3 filed late, influencer product sent without TDS and a revenue bridge that did not exist. It also found that CM2 in the MIS excluded RTO.
What changed
The trademark was assigned and recorded, the late filing compounded, the TDS paid with interest, the revenue bridge built and CM2 restated. All of it was documented in a "known issues and remediation" note placed at the top of the data room.
Outcome
The lead investor's diligence found nothing the founders had not already disclosed. The SHA negotiation focused on commercial terms. Money was in the bank five weeks after the term sheet, and the investor's partner later told the founders the remediation note was the reason they moved fast.
The lesson
Disclosed problems are negotiated. Discovered problems are punished. Find your issues first and put them on the table yourself.
Illustrative case. Figures are representative of patterns in Indian rounds, not a specific company.
Raising in the next six months? Send us your deck and we will tell you what diligence is likely to find before an investor does.
Read next: what investors check before writing a cheque and how to build an investment story. Preparing to raise? See how our pre-Series A fundraising support works.
Questions founders ask us
How long does due diligence take for a seed round in India?
Two to four weeks for most seed and pre-Series A rounds if the data room is ready. Add time for fixing findings. Total time from term sheet to money is usually 6 to 10 weeks.
What is the most common reason diligence fails for consumer brands?
Revenue and margin that do not reconcile across the deck, books, GST returns and marketplace settlements. It is rarely fraud; it is usually definitions. But investors cannot tell until you show them the bridge.
Who pays for due diligence?
Usually the company, up to a cap stated in the term sheet. Negotiate the cap in rupees and ask for it to cover both legal and financial diligence.
Can we use investor money before PAS-3 is filed?
No. Money received in a private placement must stay in the separate bank account until allotment and the return of allotment filing. Using it earlier is a Section 42 violation.
What should be in a data room for a seed round?
At minimum: corporate documents and cap table, past round documents, 18 to 24 months of MIS, audited accounts, a revenue bridge, unit economics and cohorts from raw data, tax returns, key contracts, IP ownership and licences. Use the checklist above.
About the author
Written by the Alphamark Ventures team, a fundraising advisory firm helping founders raise seed, angel and pre-Series A rounds, with a focus on consumer, consumer tech and consumer AI. Figures are as of the date shown and are for general information; this is not legal, tax or investment advice.
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